baSEL-iii and rbi guidelines

Indian banks will have to start finding ways to preserve capital and use it more efficiently, bankers and analysts said.

•  India’s central bank issued draft guidelines on Basel III capital regulations.

On Friday, the RBI said banks should have

• minimum tier-I capital of 7 percent,
•  while total capital must be at least 9 percent of risk-weighted assets under the Basel III draft guidelines.
• Implementation of the minimum capital requirements will begin from January 2013 and should be fully implemented by March 31, 2017.

BASEL III

•  the third of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis.
• Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

• Basel III will require
•  banks to hold 4.5% of common equity (up from 2% in Basel II) and
•  6% of Tier I capital (up from 4% in Basel II) of risk-weighted assets (RWA).
• Basel III also introduces additional capital buffers,
•  (i) a mandatory capital conservation buffer of 2.5% and
• (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth.
•  In addition, Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios. The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days;
• the Net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress
• For instance, the change in the calculation of loan risk in Basel II which some consider a causal factor in the credit bubble prior to the 2007-8 collapse: in Basel II one of the principal factors of financial risk management was out-sourced to companies that were not subject to supervision: credit rating agencies. Ratings of creditworthiness and of bonds, financial bundles and various other financial instruments were conducted without supervision by official agencies, leading to AAA ratings on mortgage-backed securities, credit default swaps and other instruments that proved in practice to be extremely bad credit risks.
•  In Basel III a more formal scenario analysis is applied (three official scenarios from regulators, with ratings agencies and firms urged to apply more extreme ones).

The OECD estimates that the implementation of Basel III will decrease annual GDP growth by 0.05 to 0.15 percentage point.
 Outside the banking industry itself, criticism was muted. Bank directors would be required to know market liquidity conditions for major asset holdings, to strengthen accountability for any major losses.